In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act introduced a new retirement savings vehicle called the Pooled Employer Plan (PEP). As part of SECURE 2.0 in 2022, PEPs were extended as a potential solution for tax-exempt sponsors of 403(b) plans as well. PEPs allow employers to join together to offer a single retirement plan managed by a designated pooled plan provider (PPP), to their employees. In this blog post, we'll explore what a PEP is and the benefits and risks of using one.
What is a Pooled Employer Plan (PEP)?
A Pooled Employer Plan (PEP) is a defined contribution retirement plan structure allowing multiple unrelated employers to participate in a single plan. PEPs were primarily created to provide small businesses and self-employed individuals with a cost-effective and simplified way to offer retirement benefits to their employees. Employee coverage has been a persistent issue in the private retirement system, and PEPs were designed to reduce some barriers to establishing retirement plans for small businesses. While some believe PEPs may have merit for larger plans, for this blog post, we’ll discuss them in the context for which they were designed.
Under a PEP, a designated PPP takes on the plan's administrative, investment, and fiduciary responsibilities. The PPP is responsible for selecting the investment options for the plan, ensuring compliance with IRS and DOL regulations, and providing required communication to plan participants.
Employers who join a PEP are referred to as adopting employers. Adopting employers can customize the plan to some extent by generally setting their own contribution levels and eligibility requirements. Most importantly, they are also responsible for selecting and monitoring the PPP just like any other provider under the Employee Retirement Income Security Act.
Benefits of a Pooled Employer Plan
- Cost Savings: By pooling resources with other employers, small businesses can take advantage of economies of scale and reduce the administrative and investment costs associated with maintaining a retirement plan.
- Simplified Administration: The designated PPP assumes most of the administrative and operational fiduciary responsibilities associated with the plan, including annual testing, filing the Form 5500, coordinating the audit, and selecting investment options. This allows employers to focus on their core business operations instead of spending time and resources on plan administration. It’s important to point out that many of the simplifications in administration can be achieved in alternative ways, but certainly adopting a PEP would be one of those.
Risks of a Pooled Employer Plan
- Limited Control: Adopting employers have limited control over the plan's design and operation, as the PPP is responsible for most of the plan's administration and investment management. This means that adopting employers may have less flexibility to customize the plan to meet the needs of their employees. This risk is most acute for larger employers that have developed important customizations to support their unique organization and workforce.
- Fiduciary Risk: While the PPP assumes most of the fiduciary responsibilities associated with the plan, adopting employers still have some fiduciary responsibility for selecting and monitoring the PPP. This means that adopting employers may be liable for any breaches of fiduciary duty committed by the PPP. It is also true that most operational failures in retirement plans occur in the critical hand off of data from employee to provider. PPPs would be indemnified against operational errors that occur from the adopting employer misinterpreting the terms of the plan.
- Potential for Increased Litigation: PEPs are a new retirement savings vehicle, and as such, there is still some uncertainty around how they will be regulated and how potential disputes will be resolved. This could lead to increased litigation and legal fees for adopting employers. While PEPs are marketed as reducing fiduciary risk, most recent rounds of litigation look for the deepest pockets when pursuing litigation for a fiduciary breach. Many small employers pooling assets creates a larger pool and more likely target for litigation. A PPP would likely be a party to litigation, but employers would also be easy targets for failing to select and monitor their PPP.
In conclusion, a Pooled Employer Plan (PEP) is a new type of retirement savings plan that can provide small businesses and self-employed individuals with a cost-effective and simplified way to offer retirement benefits to their employees. While some risks are associated with using a PEP, the potential benefits, such as cost savings and simplified administration, may make it a valuable option for many employers. As with any retirement plan, it is important to carefully consider the risks and benefits and consult with a qualified and independent retirement plan consultant before deciding on its appropriateness for your organization.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.